Overdrive

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Despite stalling assembly lines and plunging bottomlines carmakers are investing like never before

Overdrive
Cars, that have defined mobility and the economic growth of nations for well over a century now, have been cruising the slow lane for the past decade and a half following the global economic meltdown of 2008-09.

In India, where until yesterday car sales hit a pace as if there was no tomorrow, sputtering assembly lines and plunging bottomlines of car companies have become the new normal in the past 12 months, in the face of rising fuel prices, higher interest rates and falling incomes. As a result, some carmakers have begun to register negative growth.

Yet, from where they are parked right now, automobile companies say that the view to the future will open up to a broad vista once the economy turns the bend after the general election this summer. A new government in New Delhi will perk up sentiments and restore consumer confidence.

Small wonder then, carmakers are busy investing in capacities and planning new launches awaiting the build-up of future demand.

Volvo Auto India managing director Tomas Ernberg pointed to the 70 new laun­ches at the recently-concluded auto expo, which he said showed that auto companies were zealous about the sector despite the ongoing slu­mp and sluggish growth.

Auto industry analysts expect car firms to invest around 1.5 to 2.5 per cent of their sales in capex over the next financial year (in 2014-15), which would be slightly higher than what they spent in the previous years, focusing mostly on new launches to drive sales.

Vishnu Mathur, director general of Society of Indian Automobile Manufacturers (Siam), said the auto sector invested around Rs 22,000 crore during 2013-14, and is set to invest more in the year ahead. The country’s largest carmaker, Maruti Suzuki, has earmarked capital expenditure of Rs 4,000 crore for 2014-15, Tata Motors Rs 3,000 crore and Mahindra & Mahindra around Rs 2,500 crore. In the two-wheeler segment, Hero MotoCorp is expected to spend around Rs 1,200 crore and rival Bajaj Auto Rs 400-500 crore.

Mayank Pareek, chief operating officer for marketing and sales at Maruti Suzuki, told Financial Chronicle that the company’s board of directors recently approved Rs 4,000 crore capex for 2014-15, including in a new test track and R&D capability at its 600-acre plant in Rohtak, Haryana, as well as on new product launches. In this financial year ending March 31, the company spent almost Rs 3,000 crore in capex.

Maruti launched the hatchback Celerio at the Greater Noida auto expo last month, and showcased two concept cars — SX4 S-Cross and Ciaz. The SX4 S-Cross is expected to hit the market later this year. The company is also developing a compact sports utility vehicle likely to be launched early next year.

Torn between rising competition and a sluggish market, Maruti has been strengthening its leadership position by focusing on the rural market and niche segments to boost sales. Domestic sales rose 1.8 per cent in February to 99,758 units from 97,955 units in the same month last year.

Rising interest rates and higher fuel costs in Asia’s third largest economy, growing at its slowest pace in a decade, have pushed consumers to delay purchase of big-ticket items. This, in turn, has impacted car sales significantly.

In a bid to revive its fortunes, Tata Motors is pinning its hope for now on the all-new Bolt hatchback and entry-level sedan Zest to tap the small car market that accounts for the bulk of passenger vehicle sales in India.

To stay at par with its peers, Tata Motors has earmarked capital expenditure of Rs 3,000 crore for 2014-15, aimed at funding new product launches, research and development and enhancement of production lines. The company unveiled its first new models in four years last month, banking on two small cars to reverse sliding sales in the passenger car segment in the face of growing foreign competition.

Ankush Arora, senior vice-president and head of the commercial passenger vehicle unit at Tata Motors, told Financial Chronicle that auto firms are focusing on new launches to excite customers. The company will formally launch Bolt and Zest this year along with a number of refreshed variants of commercial vehicles.

Last year, Tata Motors watched as its rivals launched a number of popular models, including Honda Motor’s entry-level sedan Amaze and Hyundai’s Grand i10 hatchback. All this while the Tatas only tweaked and refreshed existing models.

Small cars are top sellers in a country where most people prefer to drive cheaper, fuel-efficient compact cars, as roads are clogged with traffic and parking in big cities is hard to come by.

“Clearly the compact sedan and the hatchback present the biggest opportunity from a market standpoint,” Arora said.

Sales of Tata passenger vehicles dropped 37 per cent in the first nine months of the financial year ending March, according to Siam data. It has been the steepest drop in an industry headed for a second straight year of declining sales.

Over the past two years, the Tatas have relied on strong performance of its luxury car unit Jaguar Land Rover to offset weak sales at home, where it has been losing market share toHyundai Motor, Maruti Suzuki and others.

Tata Motors says it has a pipeline of products through the next six years. But analysts say the company needs to launch more new cars. “What Tata Motors really needs is fresh designs. So far it has been depending on slight changes and model extensions,” said Bhavesh Cha­uhan, an analyst at Angel Broking. “The most important thing for the company at the moment is to focus on new launches. It doesn’t matter which model or which segment it is targeting. It’s absolutely critical for the company to start somewhere.”

The company has not launched an all-new Tata-branded passenger car since its Aria crossover in 2010.

After selling mostly die­sel-powered cars, the carmaker last month unveiled the first variant of a new series of petrol engines, which will power some of its future cars, including Bolt and Zest.

The country’s biggest sports utility vehicle manufacturer M&M plans to continue its focus on SUVs, with some exciting launches in the SUV and commercial vehicles segments.

Pravin Shah, chief executive officer of M&M’s automotive division, said, “For each new platform, our investment will be around Rs 1,000 crore in the coming years. All of these are within our Rs 10,000 crore investment plans for the next three years.” (Read Shah’s interview in this issue).

Angel Broking’s Chauhan said industrywide most companies spend between 1.5 per cent and 2.5 per cent of their total sales on capex. This year, the investments are expected to be slightly higher, as automobile companies focus aggressively on new launches to boost sales.

Hyundai Motor India plans an aggressive line-up with the Santa Fe and Xcent to improve market share and enhance production.

“Every new product introduced in the market requires a three-level capex investment in product development, capacity increase and investment at vendors and channel partners,” said Rakesh Srivastava, senior VP for marketing and sales at Hyundai Motor India.

Hyundai invested over Rs 1,000 crore in the new premium hatchback, Grand i10, and over Rs 550 crore on the Xcent model. “For Hyundai, any new product capex investment is in multiples of Rs 500 crore. Hyundai has a focused multi-pronged investment strategy with core focus on new product development backed by increased production capacity,” Srivastava said.

He said Hyundai keeps on evaluating emerging customer needs across various segments, as it has technical and technological capabilities to introduce new products from its global portfolio and develop products based on the domestic requirement, such as the Hyundai Eon, Grand and Xcent, he added.

Grand, launched last September, in two months entered the charts as one of the top five most selling car bra­nds among over 70 models, thus becoming the fastest growing brand. The company has sold over 65,541 units of Grand, which is now its fourth largest brand.

Hyundai has planned an aggressive line-up for the coming year and raised production capacity to 680,000 units a year to meet demand.

General Motors India, which has already invested over $1 billion in Indian operations, says it has created sufficient capacity to meet demand. P Balendran, vice-president at GM India, told FC that the company is working on several product programmes. As a policy, it does not disclose its financials.

The company launched the new Chevrolet Beat at the auto expo and introduced new versions of the Captiva and Cruze models.

Balendran said it was premature to predict a sales target for 2014, but he did not see strong sales this year. “We expect to grow in tandem with the market or exceed that rate slightly. The tax cut announced in the interim budget hasn’t led to any noticeable rise in sales for the time being,” he said.

Honda Cars India plans two launches in 2014-15. Jnaneswar Sen, senior vice-president for marketing and sales, said, “In April 2013, we invested Rs 2,500 crore in the Tapukara plant in Rajasthan for a new assembly line for cars, a new diesel engine component production line and a forging plant. HCIL’s cumulative investment in India so far stands at Rs 6,130 crore. We launched Honda Amaze in April 2013 and the all new Honda City this January.”

Honda will enter a new segment with the stylish midsized multipurpose vehicle Honda Mobilio and launch the third generation Jazz thereafter. With two strong products in a year, Amaze and the all-new City, Honda has posted 83 per cent growth during the April 2013-February 2014 period, over the same period of the previous year.

“The market response for the new City has surpassed expectations in terms of demand, as it gained the leadership position in sales in its segment within two months and is gaining further momentum. We are confident that Honda City too will come to dominate the segment,” said Sen.

Most carmakers are looking beyond the metros, trying to enteri tier II cities with novel marketing campaigns

Honda Cars India is planning to expand its dealership network by over 35 per cent to 230 outlets in 150 cities by March 31, 2015. “India is one of the most important markets for Global Honda. In line with our global sales target, we plan to achieve annual sales of 300,000 cars in India by the end of March 2017,” Sen said.

India is world’s sixth largest car market and hence an important market for the industry.

Volvo Auto India’s Ernberg said customers were getting a better deal as car manufacturers were trying to woo them with superior features. “The Indian customer today has an array of choices as carmakers have kept raising the standard on technology, luxury and safety, as they try to revive the dwindling market. Several low-priced models have also been launched. Most cars have become costlier by 5-10 per cent over the past five years, but features have increased manifold,” Ernberg said.

He said the attempt over the past year had been to attract youngsters. “In 2012, only one-fifth of the buyers fell in the age bracket of 18-34; that share more than doubled to 55 per cent in 2013. Yet that hasn’t translated into higher sales, given the state of the economy. Auto manufacturers are trying their best to lure consumers of all age groups,” Ernberg pointed out.

Analysts say the stress in the passenger vehicle and commercial vehicle segments is likely to continue, while the two-wheeler segment is expected to do better.

Ernberg backed the strategy of introducing new vehicles or at least variants to keep customers and acquire new ones. He said Indian consumers are value conscious. One of the key to success is giving the best in terms of safety, design and convenience.

“Differentiate your brand by offering added features. India is a place where maximum road accidents happen either due to basic infrastructural issues or driving habits. Safety is one thing that shouldn’t be compromised on,” he said.

The luxury car segment has remained largely unaffected by the macroeconomic swings. According to an Assocham report, the luxury car market in India grew at a modest rate in 2013 and is expected to raise market share in total industry volume from just 1 per cent now.

Outlook

Experts say while the new launches will help companies boost sales, these won’t add significant numbers to beat the downturn. Further, with so much focus on new launches, there will be immense competition among the manufacturers.

Shah of M&M said, “Looking at the current automotive industry scenario, it has been three consecutive quarters of declining sales growth, low capacity utilisation and reduced profit margins. We have had two slowdowns in the past 12 years, in 2002 and 2008. But I will not be wrong in saying that the current slowdown is probably the most prolonged. The auto industry could pull out of it much faster in 2008 with a slew of new launches, no holding back on investments and the stimulus package provided by the government. This time, things are different. I attribute this slowdown mostly to the consumer sentiment.”

According to Icra, domestic sales of passenger vehicles are likely to drop by 6-7 per cent in 2013-14, but grow by 2-3 per cent in 2014-15, as demand weakness is expected to impact not just the small car segment (that accounts for 55-60 per cent of total volume), but also the UV segment that showed robust growth in 2012-13.

India Ratings & Research (Ind-Ra) maintained stable to negative outlook on the sector. It expects a volume decline in the passenger vehicle (PV) and commercial vehicle (CV) segments, whi­ch started around the second quarter of 2012, to continue. But, due to the low base of FY14 and improvement in economic activity, the volume growth rate may turn positive after September.

Ind-Ra expects the decline in domestic volumes to be partially absorbed by higher exports. Exports for April-December 2013 rose by 8.5 per cent on year and now account for 19.9 per cent. The agency expects a capacity addition of 1.6 million units over FY14-FY15 in the PV segment. Due to muted demand, capacity utilisation is likely to be in the range of 45 to 47 per cent in FY15.

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